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A more recent tactic for Google is to build edge-caching servers within ISP networks bringing the content closer to the end-user and thereby improving the speed of delivery. The early indication seem to be that Google is building its own content delivery network in much the same way as Akamai has built one - except that the Google one is for internal use only, right now.

Most media companies have to use third party content delivery networks, as they don’t enjoy the Google economies of scale. For instance, the BBC uses Akamai for delivery of a significant proportion of its traffic. The Google costs are fixed whereas the BBC’s are variable - it is paying a third party supplier.

The more difficult question to answer is how much the sheer volume of YouTube traffic is helping the other Google services, especially the highly profitable search business. Significantly, we would argue - in terms of cost, reliability and speed. Furthermore, the overall bandwidth economics that Google enjoys are extremely difficult for competitors to replicate and represent a significant barrier to entry.

The Google strategy in distribution seems to be to keep control and only outsource the minimum. Logically, Google would only adopt this strategy if it felt it could gain a competitive edge through distribution. Scale matters in distribution and YouTube brings that scale to Google.

Despite BT claiming that the BBC and YouTube are enjoying a free ride, the exact opposite is true.

Video on the internet is currently extremely difficult to monetise - as we say in the Telco 2.0 Online Video market study, we are currently in a “Pirate world” where most content is available is available for “free” from a variety of sources. Old media are seeing their revenues cannibalised as content moves online into the “Pirate World”.

Eventually, either through legislation or sheer volume of eyeballs, New Players will emerge whose revenues and profits will be significant. Arguably, the effort to increase the percentage of YouTube videos that carry ads is a key indicator of this. The business model for this New World is still extremely uncertain. However, just because of the sheer volume of traffic, Google will have a key seat at the value chain negotiating table. Google will also almost certainly be the lowest cost player, in both aggregation and distribution.

Cutting out the middle man

What would make the negotiating position of Google even stronger is control of the method of licensing content. The recent Google Books deal shows that Google is starting to get extremely interested not only in the meta-data around copyright, but also in distributing payments directly to content creators and not through traditional aggregators.

In this case, the creators are the authors and the aggregators are the publishers. It does not take a major leap in thinking to see how Google could disintermediate the traditional aggregators of video and music with YouTube.

In the future, YouTube will be the key for Google establishing a strong position in the licensing of media content and thus not only controlling its own costs, but being a critical aggregator and distributor for content owners in its own right. Google will try to turn its current Achilles heel, copyright, into a future strength.

Despite BT claiming that the BBC and YouTube are enjoying a free ride, the exact opposite is true. Google is building out both compute and bandwidth infrastructure for delivery. Other video services, for example the BBC, are paying third parties such as Akamai for distribution

The real battleground is around the share of the value chain. BT is really saying that it is not earning enough from its access fees and the economic table is tilted in the favour of “free-at-the-point-of consumption” video services such as YouTube and other sites, such as Hulu and the iPlayer.

But all is not lost.

The growing size of the payTV market proves that advertising alone cannot fund all video services, and that consumers will pay for premium content. The core strategy for telcos competing is not to replicate YouTube, but by providing tools for the myriad of content owners who are unhappy with the current payback from the online world - these tools are not limited to billing and payment services, but should also include copyright protection.

The war of online value chain is not yet lost: we are still in a pirate world, and Google is one of a very small club who can afford to distribute all types of content across the globe. ®

[A longer version of this analysis appears at the Telco 2.0 Blog.]

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